Highlands, Inc. operates a sawmill facility. The company accounts for the sawdust that results from the primary sawing operation as a by-product. The sawdust is sold to another company at a price of $1.00 per hundred cubic feet. Normally, sales revenue from the sawdust is $21,200 per month. The sawdust is charged to inventory at $2.20 per hundred cubic feet, although there is no direct cost to process it.
As an alternative, Highlands can rent equipment that will process the dust into imitation logs for fireplaces. These logs sell for $25.00 per log to wholesalers, who package and add scent to them. 75 logs can be produced from 100 cubic feet of sawdust.
Cost of the equipment to produce these logs and the additional personnel required to operate the equipment are $360,000 per month, regardless of the output.
Required:
Should Highlands sell the sawdust for $1.00 per hundred cubic feet or process it into imitation logs? Support your answer with the appropriate calculations.

Question

Quizplus · Accepted Answer

The Answer of Highlands, Inc. operates a sawmill facility. The company accounts for the sawdust that results from the primary sawing operation as a by-product. The sawdust is sold to another company at a price of $1.00 per hundred cubic feet. Normally, sales revenue from the sawdust is $21,200 per month. The sawdust is charged to inventory at $2.20 per hundred cubic feet, although there is no direct cost to process it.
As an alternative, Highlands can rent equipment that will process the dust into imitation logs for fireplaces. These logs sell for $25.00 per log to wholesalers, who package and add scent to them. 75 logs can be produced from 100 cubic feet of sawdust.
Cost of the equipment to produce these logs and the additional personnel required to operate the equipment are $360,000 per month, regardless of the output.
Required:
Should Highlands sell the sawdust for $1.00 per hundred cubic feet or process it into imitation logs? Support your answer with the appropriate calculations.